The Emergency Savings - 3 Reasons You Need One
According to a Bankrate.com survey, only 40% of respondants could cover a $1,000 emergency from their savings. That means for every five people, only two of them can actually afford an emergency. This isn't a shocking discovery for me as I have known for quite a while that many people cannot afford an emergency if one came. This survey also mentioned that over a third would need to borrow money to cover an emergency. Which basically means there are people willing to go into debt if an emergency occurs.
For many people, the problem with the emergency fund is the access. Since you have access to the emergency fund, it is easy to “borrow” and use the funds. I’m a victim of that too…well not anymore, but I used to be one of those that would have a $1,000 emergency fund and then there was an emergency of me buying dumb stuff on the internet and now I have $0. But the emergency fund is probably one of the most important financial DECISIONS you can make, and you probably should have started yesterday, here are 3 reasons why you need one:
Reason #1 to have an Emergency Savings - An Emergency Fund is Insurance to Financial Collapse
I know that sounds very harsh. However, think about a medical emergency that costs you $5,000. For most people, they don’t even make $5,000 in a month to cover that medical bill. They will be paying the medical bill over a long period of time…and I mean a long period of time.
By having an emergency fund, you are literally putting a buffer in-between yourself and future financial issues. I remember putting together a $1,000 emergency fund and when an emergency like my washer dying (that’s not really an emergency, but I needed to use my emergency fund to pay for it) came up, I found that I didn’t even stress about paying to have the washer fixed. I literally picked up the phone a few hours later and called the repair person to come and fix it. I paid him like $250 and I had a fixed washer and dryer. No sweat. I then saved up over a few months to bring my emergency fund back to $1,000.
The nice thing about an emergency fund is that I didn’t have to put the money on my credit card and accumulate interest because I was too dumb to save for emergencies.
An emergency savings is basically insurance for when something goes wrong. When you get into a car accident, you use insurance to cover yourself. Same goes with emergency fund. You use it as an insurance policy and draw from it when an emergency occurs.
Reason #2 to have an Emergency Savings - You will lower your stress
One of the main reasons couples have arguments is due to money issues. Whether there is not enough money to have the life you thought you deserve or the bills that are piling up. Regardless money arguments are a stressful time. Everyone in the conversation feels they can’t do anything about the financial position of the family (you can, check out my side hustle reports here - shameless plug I know).
An emergency fund will depress the stress during real financial emergencies. You no longer have to worry about how you’re going to pay for it, but rather you can just handle it and move on. I remember my first teaching job and earning a pretty average salary. I also came into that teaching job with a lot of debt. The debt was from moving halfway across the country and living on my own for the very first time. At one point I thought there was no way I can afford any of this and I needed to find an out…like literally bankruptcy (I wasn’t going to go bankrupt, but that doesn’t mean it didn’t cross my mind). It was a stressful time because I didn’t know how I could pay for all of my expenses (which weren’t much) and all of my debt off (which was much).
After getting my finances in order and getting an emergency fund set-up (literally just $1,000 not 6 - 9 months), the emergencies weren’t emergencies and the stress basically went away. There wasn’t any stress because I knew if something was to happen, I could cover it. Regardless if the stress comes from the emergency or thinking how you are going to survive in an emergency, having an emergency fund will lower your stress because that’s one less thing you have to worry about.
Reason #3 to have an Emergency Savings - Options Starts to Open Up
This reason is a weird one but hang with me on this one. An emergency fund is supposed to be for an emergency not for extra-curricular activities such as shopping. However, once you get an emergency fund together what you are going to find is that you start to learn how to save even if it isn’t for an emergency. Once you’ve got your 6 - 9 months of emergency savings put together you’ll want to continue to save and put that money you were once saving for an emergency into a normal savings account.
When you start to build wealth with a regular savings account, you’ll start to realize there are more opportunities you can get into because you have access to extra cash. This could be situations where you can start investing and earning money through the stock market. It could be using that extra money to take the family on a vacation to Disney. You might be approached with a great business opportunity that will literally change your wealth (hopefully for the good).
When I started saving extra (in pure transparency - I’m still working on my 6 - 9 months of emergency savings), I noticed that I could put more money in investment options and had opportunities to be more financially free than I would have been if I just kept on the same path. I literally started this website with extra savings from my side hustle. I don’t put any expenses that I incur for this website on my credit card (which the old me would have done).
You’ll be amazed at what opportunities are available once you become financially free.
At the end of the day you have to make a choice when it comes to an emergency savings. As someone who didn’t have one and now has one, it makes a difference in the stress level of my finances as well as my approach to when emergencies occur (if they ever occur). What are other reasons you should have an emergency savings? Leave your comments in the comment spaces below.